We have seen a steady number of Bank Base Rate (BBR) increases since February this year.
The market predictions state that BBR will rise above three per cent by the end of 2022 and may be as high as 4.25 per cent by August 2023.
Highlighting the ever-changing situation, there has been speculation in the last week that the base rate could rise further to six per cent next year. These rises will mean an increase in costs for mortgage lenders, which as we have already started to see, will inevitably need to be passed onto the borrower.
Landlords who have mortgages set to mature during this period of anticipated higher rates will almost certainly see increased mortgage repayments. So, what can landlords do to manage their portfolios in a rising rate environment and how can brokers help them?
1. Review the portfolio
As brokers, we should be contacting our landlords and reviewing their whole portfolio. It’s important that landlords know which properties will be coming out of a fixed rate over the next year and act on these at the appropriate time. Some predictions indicate rates will go back down after peaking, so concentrating initially on the shorter term may be prudent.
Brokers should start talking to their landlords early and be looking for the most cost-effective solution for their mortgage needs. Most mortgage offers are valid for three months and currently, the application period is taking over three months to get to offer.
This means it’s worth starting the process six months before and checking the lender’s likely service standards and offer validity time to ensure you are applying at the right time – not too early but equally, as early as possible to secure the best rate available.
Brokers also need to consider that the type of rate which is now best for the landlord will look quite different to what may have been the case just one year ago.
2. Explore longer fixes
We have seen the rise of the longer-term fixed rate over the last few months, with several buy-to-let lenders moving into the seven and 10-year space. While landlords have traditionally not opted to be tied in for such an extended term, we are starting to see a shift.
Fixing for longer gives the landlord certainty of outgoings and the ability to fix the rent payments for tenants. This has a number of benefits from securing good tenants, making a property more attractive to new tenants, and keeping the private rental sector (PRS) healthy with rents at an affordable level, helping to make UK housing more affordable in a rising cost environment.
While fixing for a longer period might seem a big commitment, many lenders’ products offer portability and/or lower early redemption charges (ERCs), which makes the longer tie-in more flexible.
3. Examine alternative rate structures
Over the last decade, we have seen little other than two and five-year fixed rates, however, in more recent months we have also seen landlords moving onto discounted trackers with no ERCs. Perhaps for the landlord who doesn’t want the longer-term fixed or who feels the higher rate environment will be short lived, these rates are offering a lower headline rate and no tie in.
Landlords are hoping this type of rate will see them through the higher rate period and reduce when rates come down. And with no tie-in, the landlord can move off if a higher rate environment lasts longer or goes higher than envisaged.
Whilst rates have already started to increase, they are still good compared to pre-credit crunch average rates. Landlords who have mortgages coming up for renewal in the next few months can apply early to secure today’s lower rates and in some instances, might weigh up paying the ERC to get the rate they want.
This isn’t going to be the best for many landlords but it’s certainly worth considering in some circumstances. With lenders currently withdrawing many fixed rates due to volatile swap rates and the fallout following the mini Budget, speed is of the essence to secure rates.
4. Consider raising capital for improvements
Finally, it is, of course worth considering, raising capital to improve the property.
Whilst increasing borrowing in a raising rate environment might not at first seem like the best route, these works could attract a better tenant that is likely to stay in the property for a longer period.
We have talked a lot about the green agenda and the need to upgrade properties to achieve EPC C or above by 2025, all privately rented properties needing to meet the standard by 2028. On top of that, re-investing money into a property could make it more attractive to potential tenants.
In the rising rate environment, landlords need the help of their broker even more. This is a great opportunity to be proactive, show your knowledge of the mortgage market and options available and help the landlords not only secure a good rate but also a rate that can help their portfolio overall.